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Topic 10 PortfolioEvaluation

Topic 10 PortfolioEvaluation - Lecture 10 Portfolio...

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Lecture 10 Portfolio Performance Evaluation Aaron Gubin FIN4504
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2 Introduction Important questions: How well has my portfolio done? How well has a fund manager done? Qualitatively evaluating fund managers
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3 Introduction Two common methods: 1. Calculate past returns Arithmetic average returns Geometric average returns 1. Calculate risk-adjusted returns
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4 Risk-adjusted returns How can we measure returns? How can we measure risk? Standard deviation of fund returns: Beta of the fund: Tracking error volatility of the fund (TEV): P f r r - P benchmark r r - P σ P β p benchmark TEV=Standard deviation(r r ) -
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5 Measures of risk-adjusted performance Sharpe measure: For relative performance, compare to: P f P P r r S σ - = benchmark f benchmark r r σ - r σ P M Empirical CML f r P r P σ
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6 Measures of risk-adjusted performance Treynor measure: Jensen’s alpha: P f P P r r T β - = ( ) P f P M f J r r r r α β = - + - r β P M Empirical SML f r P r P β 1
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7 Measures of risk-adjusted performance Information ratio: P benchmark P r r IR TEV - = p benchmark TEV=Standard deviation(r r ) -
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